Wholesale prices fall as winter approaches

Many wholesale power and gas contracts fell last month for the first time since June, following commodities lower as high LNG imports and comfortable power and gas supplies gave some relief as we move into winter.

Looking towards power contracts for delivery in the near-term, day-ahead power went down 4.3% to average £64.8/MWh in October, the first monthly decline since June. Prices fluctuated throughout the month amid volatile renewables output, which when wind output is low acts to push wholesale costs higher as more expensive forms of generation are required to meet demand. The contract dropped to a one-month low of £61.3/MWh on 22 October amid forecasts of higher wind generation the following day.

All seasonal power prices fell in October, down 2.7% on average. The Summer 19 contract lost 3.1% to average £58.8/MWh, hitting a nine-week low of £56.1/MWh on 29 October. Contracts have been pressured by falling gas and commodity prices, with EU ETS carbon falling below €16.0/t. The cost of emitting carbon is factored into the cost of power generation, meaning lower EU ETS carbon prices lead to lower power prices.

Day-ahead gas dropped 9.8% to average 66.9p/th in October, also the first monthly decline since June. Day-ahead gas went as high as 72.3p/th on 2 October but fell to a 10-week low of 63.0p/th on 31 October as several LNG cargoes came to UK terminals towards the end of month, boosting supplies. Most seasonal gas contracts decreased in October falling 1.0% on average. Summer 19 gas prices fell 1.7% to average 61.6p/th, falling to an eight-week low of 66.8p/th on 31 October.

Five, eight and 16-week lows for coal, oil and carbon

EU ETS carbon curtailed 9.8% to average €19.5/t in October, its first monthly decline since December 2017. Prices were above €20.0/t for most of the first half of the month but fell to a 16-week low of €15.3/t on 30 October. This followed the release of the Autumn Budget on 29 October, which confirmed the UK’s future carbon pricing policy would be a separate UK carbon tax in a potential no-deal Brexit scenario.

Brent crude oil prices rose 2.0% to average $80.8/bl in October. Prices have responded with volatility ahead of the upcoming US sanctions on Iran, which continued to drive supply uncertainty. However, news that Saudi Arabia and Russia would increase production eased concerns and drove prices to an eight-week low.

API 2 coal prices ticked up 1.2% to average $97.3/t. Coal peaked at $100.2/t on 3 October as winter restocking in Asia continues to sustain high prices amid reports of falling coal inventories in India. However, prices dropped to $94.0/t on 11 October as European demand fell with German ARA terminal coal stocks nearing four-year highs, as water levels in the Rhine dropped to a 15-year low.

The month-ahead: High LNG import levels to sustain lower gas prices

As temperatures are forecast to remain near or below seasonal normal levels in November, gas demand for heating is expected to increase. However, November 18 gas prices dropped below day-ahead gas prices on 26 October, at 66.0p/th and 66.1p/th respectively, amid high LNG send-out. This is expected to continue into November and could weigh on gas and power prices for this winter.

With US sanctions against Iran coming into effect early in November, Brent crude oil prices could recover some recent losses and find support. However, Saudi Arabia and Russia agreed to increase production and have warned that potential oversupply in the coming months could see prices fall further.